The effect of monetary policy on financial stability : Emprical investigation for Turkey

The aim of this dissertation is to empirically investigate the effect of monetary policy on financial stability in Turkey. The Johansen multivariate cointegration method is used to analyze long-run effect of monetary policy on financial stability. Moreover, parsimonious error-correction model is estimated in order to investigate the short-term effect of monetary policy on financial stability. The impulse-response function and variance decomposition are used to analyze the dynamic effects of the monetary policy on financial stability. Empirical findings show that expansionary monetary policies contribute to financial stability in the long-run and that exchange rate, real exchange rate and bank-based variables also should be taken into consideration to provide financial stability. The empirical findings suggest that the new monetary policy framework designed by the Central Bank of the Republic of Turkey in late 2010 will contribute to maintaining financial stability.